Factory slowdown shows U.S. has little traction

Factory output rose less than forecast in September and contract signings for U.S. home purchases fell the most in three years, showing the economy was having trouble gaining traction before the government shutdown.

The 0.1% advance in manufacturing followed a revised 0.5% gain in August that was smaller than initially estimated, figures from the Federal Reserve showed today in Washington. Pending sales of previously owned homes slumped 5.6% in September, the fourth straight month of declines, the National Association of Realtors reported.

“The economy is in a shutdown-related soft patch in the fourth quarter,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, who correctly predicted a 0.6% gain in total industrial production, which also includes mines and utilities. “Everyone started to be a little more cautious in September.”

Advances in housing and manufacturing would help generate the employment gains sought by Fed policy makers, who begin a two-day meeting tomorrow. A pickup in consumer and business sentiment depends in part on how companies and households respond to an agreement by lawmakers that funds the government into early next year.

Stocks rose, leaving the Standard & Poor’s 500 Index poised for the best annual gain since 2003, as the weaker economic data fueled bets the Fed will maintain stimulus. The S&P 500climbed 0.1% to 1,762.11 at the close in New York.

Mortgage rates last month reached two-year highs, reducing affordability at the same time prices rose. With some would-be buyers pushed to the sidelines, the pace of recovery in real estate is cooling.

Fourth Quarter

“We’ll be in this weakness for a little bit, maybe even going into the fourth quarter,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, the second-best forecaster of pending home sales over the past two years, according to data compiled by Bloomberg.

Last month’s drop in pending home sales was the biggest since a 28.9% plunge in May 2010, when the extension of a government tax credit expired.

Today’s Fed data showed that factory (IPMGCHNG) output, excluding a pickup in motor vehicle assemblies was stagnant after a 0.2% August gain as production of appliances, electronics and chemicals weakened. Economists projected a 0.3% increase in manufacturing, which accounts for about 75% of total output, according to the median forecast in a Bloomberg survey.

Total industrial production last month was boosted as higher temperatures drove up electricity use. The median forecast of 85 economists surveyed called for a 0.3% September gain.